SSABR Pty Ltd v AMA Group Ltd

Supreme Court of NSW|2024-10-25|Before: Rees J, Mr JA

Solicitors: CBD Law (Plaintiffs) K&L Gates (Defendants) File Number(s): 2021/257009

JUDGMENT

HER HONOUR: This matter has been remitted for determination of prayers 1 to 4 of the Summons: SSABR Pty Ltd v AMA Group Ltd [2024] NSWCA 175. The plaintiffs there seek: 1. A declaration that on a proper construction of the Business Sale Agreement dated 3 October 2018 (the BSA), 'Jobkeeper Payments' received by the first defendant and/or the second defendant from the Commonwealth of Australia in relation to the Businesses (as defined in clause 1.1 of the BSA) between 12 October 2018 and 12 October 2020 are to be included as income in the calculation of EBIT for the purpose of calculating the Earn-Out Amount referred to in clause 5.3 of the BSA. 2. A declaration that on a proper construction of the BSA, any rebates received from in relation to the Businesses between 12 October 2018 and 12 October 2020 are to be included as income in the calculation of EBIT for the purpose of calculating the Earn-Out Amount referred to in clause 5.1 of the BSA. 3. A declaration of the correct quantification of the Earn-Out Amount on the proper construction of the BSA. 4. Further, or in the alternative, an order that the first defendant specifically perform clause 5.3 of the BSA.

Witnesses

Relevantly, the plaintiffs relied on the evidence of Mr Nercessian and former Chief Commercial Officer of AMA Group, Peter Bubeck. No issues of credit arose in respect of Mr Bubeck, while I approached Mr Nercessian's evidence with caution. The defendants relied on the evidence of Chief Executive Officer, Carl Bizon. No issues of credit arose.
Expert forensic accountant, Brian Morris, was retained by the plaintiffs. His reports were reviewed by expert forensic accountants, Andrew Archer and Darryn Hockley of Grant Thornton, for the defendants. Only Mr Archer's expert evidence is relevant to the remitter. All expert witnesses attended to their task with professionalism and skill. I did not agree with the defendants' criticisms of Mr Morris.

AMA Group

Mr Bizon described AMA Group as the leader in the Australia and New Zealand collision repair industry and associated auto parts market. According to the Annual Report for AMA Group for the 2019 financial year - being the financial year in which AMA Group acquired the Businesses - AMA Group was the holding entity of 43 subsidiaries in Australia and New Zealand. One subsidiary was the second defendant, AMA Group Solutions, which appears to have been the employer of the group's employees. The group comprised a Vehicle Panel Repair division and Automotive Components & Accessories Divisions. The AMA Group then had 130 sites (or smash repair shops). Today, AMA Group has 56 subsidiaries, 180 sites and over 3,700 employees.
In 2015, AMA Group entered into a confidential contract with a paint manufacturer and supplier. The term of the agreement was for 10 years. In short, the AMA Group agreed to buy all its paint from the manufacturer, which agreed to give a discount "to all current and additional new business acquired by THE CUSTOMER".
In addition, the 10-year term of the contract was divided into tranches. At the beginning of each tranche, the manufacturer would pay the AMA Group a "market investment amount". During that tranche, AMA Group was obliged to purchase a certain amount of paint from the manufacturer. If AMA Group failed to purchase the required amount of paint, then it undertook to repay a portion of the moneys received. If AMA Group purchased the amount of paint required in any given tranche before that tranche had ended, then that tranche ended earlier and the next tranche began but the 10-year term of the contract remained.
As Mr Bizon explained the arrangement, AMA Group received a payment from the manufacturer which was, essentially, a pre-paid rebate. In return, AMA Group was required to purchase a minimum amount of paint over a particular period of time. In return for a substantial multi-year purchasing commitment by AMA Group to the manufacturer, AMA Group received a benefit in the form of a trade discount on the invoice price of paint. Whilst most participants in the collision repair industry bought paint through distributors, AMA Group bought direct from the manufacturer, thereby eliminating the distribution margin. This arrangement benefitted each of AMA Group's individual sites and was reflected in their profit and loss, achieving a substantial benefit over independent sites. In addition, the manufacturer advanced a "market incentive", which was a prepaid amount of funds which could be used by AMA Group as it wished. There was a corresponding liability in AMA Group's accounts for that money. If AMA Group changed suppliers, or missed the minimum purchase volumes, or allowed one of its sites to buy a different brand of paint, then the market incentive became due and payable.
Given the nature of the arrangement, Mr Bizon said that the market incentive and corresponding liability was recorded at the AMA Group level. The arrangement was disclosed in AMA Group's annual report for the 2019 financial year as follows: Deferred Income In a previous financial year, the Group entered into an agreement with a key supplier to purchase product and services from the supplier over an agreed period of time and receives various preferential benefits; one of which is a market investment incentive. To satisfy the requirements of this agreement, the Group must purchase from this supplier in accordance with agreed terms. The incentive is being amortised as this liability reduces.
The deferred income was recorded in the balance sheet as a liability. Mr Bizon explained that the balance sheet benefit was amortised as paint was consumed across the business, to offset the liability.

The Businesses

Mr Nercessian is a spray painter. He established Simply Smashing. In 2006, the first plaintiff, SSABR Pty Ltd, was incorporated to operate the business. In 2016, Mr Nercessian incorporated the second plaintiff, HAAPRC Pty Ltd, to buy a prestige car smash repair shop, Harris & Adams. Mr Nercessian became the general manager of both businesses. Simply Smashing generally obtained its paint from Dulux while Harris & Adams got its paint from the same manufacturer who supplied AMA Group.
From March 2017, Mr Nercessian negotiated the sale of the Businesses to AMA Group. He dealt with AMA Group's Acquisitions Director, Jim Timuss. According to Mr Nercessian, Mr Timuss described the benefits of AMA Group acquiring the Businesses as "we get paint cheap and with rebates our consumables and parts are cheaper. … you will need to purchase your paint from [the manufacturer]. AMA receives rebates meaning you will save money. We get a big rebate which you will get." Mr Nercessian said that he was told during negotiations that the rebates would "reflect back" to the businesses. Mr Nercessian denied being told by Mr Timuss that, by becoming an AMA business, Simply Smashing and Harris & Adams would benefit from the discount on paints supplied by the manufacturer.
Mr Timuss did not give evidence. His absence was explained and I drew no adverse inference. This had the consequence, however, that the only evidence of these conversations came from Mr Nercessian. There was no contemporaneous record of this being said. Mr Nercessian's affidavit describing the conversation was made four years later. I approached his evidence with caution. In the result, I attach little weight to Mr Nercessian's description of what he was or was not told about the paint rebate.
The plaintiffs asserted various representations said to have been made by Mr Timuss, including that the Businesses would receive a rebate from the manufacturer in respect of paint purchases. In my first judgment, I was not persuaded that Mr Timuss said the words attributed to him. That remains the case.

Business Sale Agreement

On 7 September 2018, a Binding Heads of Agreement was signed. A due diligence process followed.
On 3 October 2018, the Business Sale Agreement was executed by the plaintiffs as Vendors and AMA Group as the Purchaser. The Vendors agreed to sell the Businesses and the Assets for the Purchase Price and on the terms and conditions of the agreement: cl 3.1. Businesses meant Harris & Adams and Simply Smashing: cl 1.1(k). Assets meant all of the assets owned by the Vendors in the Businesses including business names, email addresses, business records, plant and equipment, goodwill, intellectual property rights, stock, work in progress and material contracts: cl 1.1(g). Title to the Businesses and the Assets passed to AMA Group on Completion: cl 3.2.
The Purchase Price was an Initial Cash Payment ($4.8 million) payable on the Completion Date and the Earn-Out Amount: cl 4.1. Earn-Out Amount meant the amounts (if any) paid to the Vendors in accordance with cl 5.1: cl 1.1(z). Clause 5.1 provided that the Earn-Out Amount was calculated by multiplying EBIT for the Businesses for the Earn-Out Period by 4 less the Initial Cash Payment. (I will return to cl 5.1 at [46].) EBIT meant Earnings Before Interest & Tax: cl 1.1(cc). Earn-Out Period meant the period of two calendar years commencing on the Completion Date: cl 1.1(bb). As considered in my primary judgment, "EBIT for the Businesses for Earn-Out Period" meant total EBIT for the two calendar years commencing on the Completion Date. Clause 5.3 obliged the Purchaser to pay the Earn-Out Amount to the Vendors within 90 days of the second anniversary of the Completion Date.
Clause 8 concerned employees and superannuation. The Purchaser would offer employment to "such Employees as it determines on terms and conditions as it determines, but in any event on terms being no less favourable than their current terms of employment": cl 8.1. Employee meant "an employee of either Vendor in connection with the Businesses … as listed in Schedule 6": cl 1.1(ff). Schedule 6 listed 28 employees of Simply Smashing and 6 employees of Harris & Adams.
Clause 23 of the Business Sale Agreement provided: 23. Further assurance Each party will from time to time do all things (including executing all documents) necessary or desirable to give full effect to this Agreement.
As I noted in my first judgment, cl 23 is a mechanical provision directed to ensuring that the contracting parties do what needs to be done to effect the sale of the Businesses, including calculating the Earn-Out Amount in accordance with cl 5.1 and paying the Earn-Out Amount in accordance with cl 4.1(b).

Earn-Out Period

The purchase was completed on 12 October 2018. The Initial Cash Payment was paid. According to the Annual Report for AMA Group for the 2019 financial year, the acquisition of the Businesses were two of 21 acquisitions that year, growing the number of sites in the Vehicle Panel Repair division of AMA Group to 130.
On 15 October 2018, Mr Nercessian commenced working for AMA Group Solutions as Centre Manager for the Businesses. The Businesses' employees were employed by AMA Group Solutions. Mr Morris observed that AMA Group Solutions also held the business names of the Businesses after Completion.
Mr Nercessian said that, once AMA Group took over the Businesses, paint was obtained exclusively from the manufacturer. Invoices from the manufacturer were not provided to him but were sent to and processed at AMA Group's head office. Whether paint purchased from the manufacturer after Completion cost less than paint previously sourced by the Businesses is not known, as the profit and loss statements provided for the Businesses during the due diligence period did not specifically itemise expenses incurred in respect of paint.
Things started off well enough. On 21 December 2018, there was a hailstorm on the Central Coast of New South Wales, which resulted in plenty of work for the Businesses. On 24 December 2018, Mr Bubeck emailed the AMA executive team applauding Mr Nercessian's industry in a crisis, "He's super positive and in no way overwhelmed by the task ahead. … Let's milk this for all its worth gents. Merry Christmas."
On 12 June 2019, AMA Group renewed its contract with the manufacturer. The new contract followed the same format as the 2015 contract, but had more onerous provisions. The 2019 Annual Report also reported that AMA Group received the second tranche of the market investment amount: During the current year, the Group received a second tranche equal to $30.9 million. At 30 June 2019, an amount of $12.5 million (2018: $7.1 million) has been classified as current representing the anticipated reduction in this incentive over the next twelve months.
In March 2020, the Commonwealth, State and Territory governments announced lockdowns in response to the COVID-19 pandemic. On 30 March 2020, the Commonwealth Government announced "a historic wage subsidy to around 6 million workers … through their employer … The $130 billion JobKeeper payment will keep Australians in jobs as [we] tackle the significant economic impact from the coronavirus. The payment will ensure eligible employers and employees stay connected while some businesses move into hibernation." A payment of $1,500 per fortnight would be made to employers "for up to six months, for each eligible employee that was on their books on 1 March 2020 and is retained or continues to be engaged by that employer. … Eligible employers will be those … who self-assess a reduction in revenue of 30 per cent or more, since 1 March 2020 over a minimum one-month period."
AMA Group Solutions lodged JobKeeper applications, including in respect of the Businesses' employees who it now employed, and received JobKeeper payments.
On 5 May 2020, the Chief Financial Officer of the AMA Group, Stephen Harding-Smith, emailed Mr Nercessian regarding the effect of JobKeeper on the Earn-Out Amount. Where the JobKeeper subsidy was not designed for individual sites to profit, AMA Group's "firm position" was that it did not want its sites to create artificial profit from the subsidy. But nor did AMA Group want its sites to suffer the costs of the staff that had been stood down. Mr Harding-Smith advised that AMA Group was applying a number of measures to the treatment of the JobKeeper subsidy within all of its sites, including removing the costs of stood down employees from each sites' profit and loss during the period of the JobKeeper subsidy. This meant that sites would not be disadvantaged by the costs incurred of standing staff down. Further, "Site P&Ls will be purely based on the remaining team's performance".
In addition, Mr Harding-Smith advised that the costs of apprentices would be removed from each site's profit and loss statement during the JobKeeper subsidy period. All eligible apprentices would receive the $750 per week but the cost would not appear in the site's profit and loss, "This means sites won't be unfairly disadvantaged by the higher wages costs that we need to pay Apprentices (given that we need to pay them a minimum of $1,500 per fortnight) … With costs being removed from the site P&Ls, all labour produced by apprentices in this period is effectively free." Finally: "Any remaining amount will be directed as appropriate and will not be allocated to site P&L's, as these government subsidies are not part of the ongoing earnings of the individual sites."
Mr Nercessian was asked to contact him with any questions. Mr Nercessian simply replied, "Thanks for the update".
Mr Bubeck said there was a significant downturn in smash repair work during the COVID-19 lockdowns and work from home requirements in 2020. During that period, the workshops took whatever work they could get, when they could get it. On 21 April 2020, AMA Group emailed Mr Nercessian for his thoughts on site closures to cut costs and maximise profits, "all our sites are being reviewed … many are being hibernat[ed] to cut costs and maximise profit. … Work volumes look to be heading towards 50% across the country hence the hibernations." Harris & Adams was still busy but Simply Smashing's business had "dropped off considerably from its normal volume and looks like it could absorb the work if [Harris & Adams] went into hibernation." Mr Nercessian said that the Businesses were still suffering badly from COVID-19 lockdowns and the work-from-home rules in July 2020, when he resigned.

Earn-Out Calculation

The second anniversary of the completion of the Business Sale Agreement, and the end of the Earn-Out Period, was 12 October 2020. On 10 November 2020, the General Manager Finance of AMA Group, Paul Opperman, provided a calculation of EBIT for the Businesses in the amount of $646,808. (No certificate was provided, as required by the Business Sale Agreement.) In calculating this figure, Mr Opperman did not include JobKeeper payments referable to the Businesses' employees nor any paint rebate received by AMA Group referable to the Businesses' paint usage. Applying the multiplier of 4, the Earn-Out Amount was $2,587,230. Where this was less than the Initial Cash Payment of $4.8 million, no Earn-Out Amount was payable.
On 23 November 2020, the plaintiffs issued a Dispute Notice, on the basis that AMA Group had failed to pay the correct Earn-Out amount as calculated in accordance with cl 5.1(a) of the Business Sales Agreement. The plaintiffs requested additional information in respect of the calculation, including in respect of the treatment of paint rebates and JobKeeper. Further information was supplied. When providing information in respect of the employees of the Businesses for the Earn-Out Period, Mr Opperman noted: The Earn-Out calculation is based upon an underlying mechanism rewarding the Vendor for sustainable earnings through the effective application of a multiplier. It is a mechanism commonly used to arrive at a value of a business. To include a one-off government subsidy that is designed to incentivize companies like AMA to retain staff during the COVID-19 pandemic is fundamentally inconsistent with the structure, language and intent of the Earn-Out. We also note that in good faith, AMA removed the cost of stood down staff from the P&L so that the Vendor was not unfairly disadvantaged by including the cost of staff that were not working. In other words, the only staff included in the P&L were staff that were working at the sites and contributing to the EBIT.
I note at the outset that Mr Morris opined that the Earn-Out Amount was $374,460 if AMA Group had not halved the EBIT during the Earn-Out Period. I did not understand AMA Group to disagree with this calculation. The plaintiffs are entitled to this amount given the Court of Appeal's judgment in respect of rectification.
Further, the plaintiffs contended that AMA Group was in breach of cl 5.1 of the Business Sale Agreement as it failed to calculate the EBIT for the Businesses by "apply[ing] accounting treatment in accordance with Australian Accounting Standards" in two respects. First, AMA Group failed to include payments received from the Commonwealth of Australia by way of JobKeeper payments and other COVID-19 government grants within the meaning of AASB 120. Second, AMA Group failed to include payments received by way of 'rebates and/or market incentives' from the manufacturer. As a consequence, AMA Group was said to have breached cl 5.3 of the Business Sale Agreement by failing to pay the Earn-Out Amount to the plaintiffs, properly determined in accordance with cl 5.1, within 90 days of the second anniversary of the Completion Date or at all. AMA Group denies that it so breached the Business Sale Agreement.

EBIT for the Businesses

As will be seen, the experts agreed that AMA Group applied accounting treatment in accordance with Australian Accounting Standards in the preparation of its accounts, properly accounting for paint rebates and JobKeeper payments on a consolidated or 'group' basis. The issue is how paint rebates and JobKeeper should be treated when identifying the Earnings for the Businesses, as opposed to AMA Group, in order to calculate the Earn-Out Amount.
Mr Morris considered that earnings were exactly the same as profit prepared consistently with Australian Accounting Standards. Mr Morris also referred to the Conceptual Framework for Financial Reporting, prepared by the Australian Accounting Standards Board (AASB), which was not an accounting standard per se but was the foundation of such standards. The Conceptual Framework for Financial Statements promoted substance over form: para 2.12, "Faithful representation". Further, the Conceptual Framework for Financial Statements noted that a reporting entity is one which is required to, or chooses to, prepare financial statements and can be a single entity, a portion of an entity, or more than one entity but is not necessarily a legal entity: para 3.10. In preparing the Earn-Out Calculation, the AMA Group treated the Businesses as an accounting entity and produced a profit and loss statement showing revenue and expenses on that basis rather than focussing on the legal entities. Mr Morris considered that it followed from that (in his view, correct) approach that the manufacturer's rebates should not be treated separately from paint expenses, nor should the JobKeeper payments be treated separately from wages.
Mr Archer was of the opinion that there was no accounting standard or accounting authority that defined the way in which EBIT should be calculated under a business sale agreement, if not otherwise defined in that agreement. Whilst EBIT was a commonly used term in financial reporting, there was some divergence in practice as to how EBIT was calculated. The need for guidance in this area gave rise to the Australian Security and Investment Commission (ASIC) publishing Regulatory Guide 230, Disclosing Non-IFRS financial information. ASIC recognised that financial information presented other than in accordance with accounting standards, that is, non-IFRS financial information, can be useful but has the potential to be misleading. ASIC noted that non-IFRS profit information is a common type of such information, where "Entities calculate non-IFRS profit information in different ways and use different descriptions": reg 230.17. The guidelines promote a reconciliation between non-IFRS and IFRS financial information, separately itemising and explaining each significant adjustment.
Mr Archer considered that there was room for judgement to be applied as to what was earnings, and whether any adjustment needed to be made to the accounting profit as presented in the statutory financial reports to determine what the earnings were for the purposes of calculating EBIT. In practice, organisations assessed earnings differently. Whilst the starting point for determining earnings was usually net profit, some judgement remained to be applied by the person preparing the calculation of EBIT as to what was an earning and what was not. Normal commercial practice dictated that earnings would be normalised for things such as one-off or non-recurring items.

Submissions

The plaintiffs submitted that the relevant provisions of the Business Sale Agreement in respect of the Earn-Out focused on the performance of the "Businesses" as they were conducted at separate locations with their own employees. Mr Archer was said to have erroneously focused on the legal entities rather that the performance of the Businesses, as an accounting and economic entity, for the purpose of the Earn-Out. Mr Morris' opinion should be preferred, being that the elements or components of EBIT are derived from Australian Accounting Standards, consistently with cl 5.1(b) of the Business Sale Agreement. The suggestion that cl 5.1 reserved a subjective judgement to AMA management to decide what should and should not be included in earnings based on its business judgment was the very thing the clause was directed against. By imposing the objective standard and discipline of adherence to the Australian Accounting Standards, it avoided the possibility of any bias.
AMA Group submitted that Mr Morris' opinion was based on a flawed assumption that the Australian Accounting Standards governed EBIT for the Earn-Out calculation. Rather, the provisions of the Corporations Act 2001 (Cth) which mandate the application of the 'accounting standards' are confined to specific instances, which did not include the task at hand. Although aspects of Australian Accounting Standards may inform some of the management judgement and decisions as to which revenue or expenses fell within earnings and thus EBIT, the standards were not conclusive, binding or determinative in this context. The approach adopted by AMA's management was open to them and within the range of accepted practice for preparing an EBIT calculation.

Consideration

This is largely a question of construction of the Business Sale Agreement. The principles are uncontentious. The meaning of the contract is determined objectively, by reference to what a reasonable person would have understood the contract to mean having regard not only to the text of the document but to the surrounding circumstances known to the parties and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22] (per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ). The context includes the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46] (per French CJ, Nettle and Gordon JJ) citing Electricity Generation Corporation v Woodside Energy (2014) 251 CLR 640 at 656-657; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
Clause 5.1 provided: 5.1 Calculation of the Earn-Out Amount (a) The Vendors shall be entitled to the Earn-Out Amount calculated by the Purchaser as follows: EBIT for the Businesses for the Earn-Out Period MULTIPLIED by 4 LESS the Initial Cash Payment (on an unadjusted basis). (b) For the purposes of determining the EBIT, the Purchaser shall apply accounting treatment in accordance with Australian Accounting Standards. (c) Within 30 days of the second year anniversary of the Completion Date (Earn Out Calculation Date) the Purchaser will determine the EBIT figure for the Earn-Out period and such figure will be detailed in a certificate to be delivered to the Vendors by the Chief Financial Officer of the Purchaser in such form as he may consider reasonably necessary from time to time.
It will be recalled that, under the Business Sale Agreement, AMA Group did not acquire the plaintiffs' shares, but the Businesses and Assets owned by those companies. It must have been in the parties' contemplation, when entering into the Business Sale Agreement, that the Businesses' financial results during the Earn-Out Period would become part of AMA Group's financial results. But cl 5.1(a) required AMA Group to calculate the Earn-Out Amount based on "EBIT for the Businesses for the Earn-Out Period", that is, the Earnings Before Interest & Tax of Simply Smashing and Harris & Adams: cll 1.1(k) and (cc). In context, EBIT for the Businesses could also be put as EBIT of, or referable to, the Businesses, as opposed to AMA Group.
As to how to go about the task of calculating EBIT for the Businesses, cl 5.1(b) provided, "the Purchaser shall apply accounting treatment in accordance with Australian Accounting Standards." Clause 1.1(h) defined "Australian Accounting Standards" as: (i) the requirements of the Corporations Act in relation to the preparation and content of accounts; and (ii) generally accepted accounting principles and practices in Australia consistently applied for private companies and/or trusts (as applicable), except those principles and practices which are inconsistent with the standards or requirements referred to in sub-clause (i);
This definition should be read into cl 5.1(b) and then the sub-clause construed following the method described in Kelly v R (2004) 218 CLR 216; [2004] HCA 12 at [103] (McHugh J). The task remains "to consider the purpose, as well as the text, of the definition and the context in which it is used. The sense in which the defined term is used cannot be determined mechanically" but depends on the true construction of the entire provision in which the word appears: Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431; [2015] NSWCA 156 at [87] (per Gleeson JA), citing YZ Finance Company Pty Ltd v Cummings (1994) 109 CLR 395 at 402 (Kitto J).
One way of reading cl 5.1(b) is that AMA Group was required to - "shall" - apply accounting treatment in accordance with the Australian Accounting Standards, even if those standards did not otherwise apply to the situation at hand. But when the definition of Australian Accounting Standards is deployed, then I consider that cl 5.1(b) obliged AMA Group to apply accounting treatment in accordance with the Australian Accounting Standards to the extent that those standards were applicable by reason of the Corporations Act.
In addition, AMA Group was required to apply generally accepted accounting principles save to the extent that those principles were inconsistent with accounting standards applicable by reason of the Corporations Act. Specifically, AMA Group was required to apply generally accepted accounting principles "for private companies and/or trusts (as applicable)", being entities which are not required to prepare financial reports under the Corporations Act or apply accounting standards: ss 45A(2) and 292(2), Corporations Act.
Generally accepted accounting principles has been described as an undefined term in Australia: Brand v Digi-Tech (Australia) Ltd [2002] NSWSC 416 at [1212] (per Einstein J). In the United States, GAAP is "a technical accounting term that encompasses the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. It includes not only broad guidelines of general application, but also detailed practices and procedures. Those conventions, rules and procedures provide a standard by which to measure financial presentation": Brand at [1212]. A similar definition now appears in the Encyclopaedic Australian Legal Dictionary.
Applying cl 5.1(b) and its embedded definition to the task at hand, AMA Group is a reporting entity and required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act 2001 (Cth) by complying with accounting standards issued by the AASB. The experts agreed that it did so. But AMA Group was required to calculate EBIT for the Businesses. The experts agreed that EBIT was not defined within Australian Accounting Standards, but the 'inputs' into the equation were to be determined in accordance with such standards, in particular, earnings. I have earlier set out Mr Morris and Mr Archer's opinions as to how this task should be approached.
While the Businesses are owned by AMA Group, neither expert pointed to an applicable accounting standard accounting standards prepared by the AASB which governed how the earnings of AMA Group should be attributed to two of its 180 sites. But it is clearly necessary to make some kind of adjustment, where AMA Group's earnings are clearly not the Earnings of the Businesses.
Both experts were essentially saying the same thing, whether by reference to concepts of "substance over form" or making adjustments to earnings to remove extraordinary items which may produce a non-representative figure. Each, in their own way, was approaching the task by applying generally accepted accounting principles, consistently with cl 5.1(b) and its embedded definition of Australian Accounting Standards, in particular, cl 1.1(h)(ii).
On this subject, I prefer Mr Archer's view that, where there is no accounting standard that governs the position, an element of judgement may be involved in calculating Earnings for the Businesses, including making adjustments to the net profit as presented in AMA Group's statutory financial reports. The touchstone remains the words of cl 5.1(a), obliging AMA Group to identify the Earnings for (or of or referable to) the Businesses.

Paint rebates

Turning then to the first item in respect of which it was said that AMA Group failed to comply with the requirements of cl 5.1, I have described the contractual arrangements between AMA Group and the manufacturer, and the accounting treatment in AMA Group's accounts at [9]-[13]. As at October 2020, the general ledger of AMA Group recorded a non-current liability of $62,330,996 in respect of deferred income from the manufacturer.
Mr Bizon said that AMA Group does not receive any rebates from the manufacturer in respect of paint products purchased by Simply Smashing or Harris & Adams. Rather, all businesses owned by the AMA Group, including Simply Smashing and Harris & Adams, receive a substantial discount 'across the board' for paint products. The discount was received in its entirety by the relevant businesses. On the advice of its auditors, AMA Group treated the "market incentive" as a liability. It is not paid or received on the basis of individual store performance, nor treated as a rebate for any of the businesses or at all. While individual sites shared none of the liability, nor did they share the benefit; both the liability and the benefit sit at group level.
Mr Morris agreed with the manner in which AMA Group accounted for the market incentive payments at a group level, being to initially recognised these payments as income received in advance (on the basis that, if AMA Group did not purchase product from the manufacturer, that incentive had to be repaid) and then recognising the market incentive payments as income (or a negative expense) when product was purchased from the manufacturer, as AMA Group no longer had the obligation to repay that portion of the upfront marketing incentive payment. Mr Archer agreed, considering that AASB 102 Inventories applied; the treatment of the market incentives in AMA Group's annual report was in accordance with this accounting standard as well as AASB 137 Provisions, Contingent Liabilities and Contingent Assets.
The experts differed, however, as to whether the paint rebate should be included when calculating EBIT for the Businesses. Mr Morris was of the opinion that generally accepted accounting practice required that income and expenses were recorded in the entity or division of an entity that generated the income and incurred the expenses. Where the Businesses were owned and operated by AMA Group and were not separate entities, it followed that the cost of the manufacturer's products used by the Businesses were to be measured after deducting an appropriate portion of the market incentives by reference to the portion of the manufacturer's products used in the Businesses. A portion of the marketing incentive was directly attributable to the Businesses, which generated income for AMA Group from every purchase of paint from the manufacturer. But for the Businesses purchasing paint from the manufacturer, the market incentive income reported by the AMA Group would have been lower, which would have resulted in lower profits.
Mr Morris considered that, whilst the rebate arrangement was between the manufacturer and AMA Group, a fundamental principle within the accounting standards was that a rebate should be deducted from the cost of the item purchased. The substance of the matter required that the rebates be attributed along with the paint costs to the businesses. In light of the market incentive, Mr Morris calculated that the Earn-Out Amount had been understated by $1.511 million.
Mr Archer disagreed with Mr Morris' opinion that a portion of the marketing incentive should be recognised as income for the Businesses. Where the contract was between AMA Group and the manufacturer, and the liability to repay the market incentives received upfront rested solely on AMA Group, benefits received from the arrangement should be recognised by AMA Group and not the Businesses. AMA Group had the right to receive market incentives. The Businesses did not. As such, no asset should be recorded in the financial statements of the Businesses. Likewise, the obligation to repay the market incentives rested with AMA Group, not the Businesses, and thus no liability should be recorded in the financial statements of the Businesses. The market incentives were not recognisable by the Businesses under AASB 102 or AASB 137 or in accordance with the appropriate interpretation of the Conceptual Framework for Financial Reporting.
Nor did generally accepted accounting principles and practices change Mr Archer's view where, in his experience as an auditor, there was no standard practice in this regard. Mr Archer said that there was no standard way of allocating incentives and rebates within a group of entities. In practice, Mr Archer observed "it's a very common practice of not allocating the rebates down to the different components or divisional operations of organisations because they don't want to cloud the operating performance of those business units [or] wrongly incentivise executives and management within those business units. … the benefits of those rebate arrangements often held at the corporate level to reflect … the procurement departments … that have put in place those arrangements which will then benefit the overall group."

Submissions

The plaintiffs submitted that Mr Archer's opinion in relation to the manufacturer's market incentives should not be accepted, where he focused on the rights and obligations of legal entities rather than the financial performance of two of the many businesses owned and operated by AMA Group, being Simply Smashing and Harris & Adams. The Businesses were not legal entities and could not enter into binding agreements with the manufacturer. AMA Group was the owner and operator of the Businesses. Every item of revenue and expense of the Businesses was, strictly speaking, attributable to the rights and obligations of AMA Group. The only relevant accounting question for the purposes of cl 5.1 was the revenues generated and the expenses incurred by the Businesses, where the manufacturer's agreements applied to all of AMA's businesses. The rebates received by AMA were attributable to the Businesses. Where AMA had included the paint ordered by the Businesses as an expense in the calculation of EBIT, a business-like interpretation of the "EBIT for the Businesses" would include income received as a set-off to that expense. The fact that a liability 'sits' at the AMA level was irrelevant where the focus of the Earn-Out Amount was on profitability. The liability only arose because the rebate was prepaid.
AMA Group submitted that Mr Archer's views should be preferred, since Australian Accounting Standards did not directly apply to the calculation of EBIT in respect of the manufacturer's market incentives. Mr Archer's views were also consistent with the evidence of Mr Bizon in respect of the arrangement with the manufacturer.

Consideration

The experts agreed that AMA Group had complied with Australian Accounting Standards when reporting paint rebates in its Annual Report. The question was whether this rebate should be taken into account when calculating EBIT for the Businesses. Is the market incentive for, of, or referable to, the Businesses? I think not.
The entitlement to the market incentive arises from a contract between AMA Group and the manufacturer, which pre-dated the Business Sale Agreement by three years. The amount of paint which AMA Group was required to buy from the manufacturer did not increase on acquisition of the Businesses. True it is that the Businesses' usage of paint contributed in some (probably small) way to AMA Group purchasing the required amount of paint in the relevant tranche. Absent the Businesses using the manufacturer's paint, the AMA Group had some 130 to 180 other sites to draw upon to achieve the required amount of paint to be purchased from the manufacturer in that tranche.
I do not think it can be said that the rebate was for, of or referable to the Businesses but for, of or referrable to AMA Group. The substance of the matter is that two car smash repair shops in Gosford did not accomplish the rebate arrangement. Mr Morris acknowledged that that this was an arrangement that could only be made at the highest corporate level of AMA Group. As Mr Bizon said, "the scale of AMA allows it to achieve a benefit in buying paint that belongs at the group level where the liability also sits. So the individual location share none of the liability, so they share none of the benefit. The liability sits at group, and if the group defaults, the group is responsible, individual subsidiary entities are not. So … the benefit and the risk and the scale benefit lies with the group."
I prefer Mr Archer's opinion as to whether there was any generally accepted accounting principles and practices in respect of this matter, where he had recent and widespread experience as an auditor. This is not to criticise Mr Morris but to note that his experience as an expert witness over many years means that he has, on occasion, looked at accounting practices but has not been at the 'coal face' for some time. I prefer Mr Archer's view, being that there was no basis for cascading the effect of the contract with the manufacturer down to the individual components of the AMA Group, "because the contract with [the manufacturer] was entered into before this acquisition was even contemplated, that effort was done by the company and the [procurement] teams that were in place at that time and the legal framework for the contract is the rebate rests with AMA [Group] to the company and there's no basis under the accounting standards for that to then be allocated to the individual business units." I am not satisfied that AMA Group breached the Business Sale Agreement for failing to include rebates attributable to the Businesses' usage of paint during the Earn-Out Period.

JobKeeper

Turning to the second item, Mr Morris noted AMA Group's treatment of JobKeeper payments. In respect of apprentices, who were remunerated at less than the JobKeeper payment of $1,500 a fortnight, AMA Group recognised the JobKeeper payment as income and also recognised the expense of the apprentices' employment during the period when JobKeeper payments were made. A similar treatment was adopted in respect of employees that were stood down, where the JobKeeper payments relating to that employee were recognised as income by AMA Group, as was the wage expenses associated with those employees. (The Businesses had 36 employees at the beginning of the JobKeeper period and 21 employees by the end of that period.) For employees who were not stood down, AMA Group recognised the JobKeeper payments as income but the wages of ongoing employees continued to be recorded as expenses of the Businesses. By this approach, AMA Group recognised $645,000 of JobKeeper income in respect of the Businesses' employees, of which $195,000 were wages for employees who had been stood down and would otherwise have been recorded as an expense of those businesses. On a net basis, $450,000 of income was recognised by AMA Group for JobKeeper payments for ongoing employees of the Businesses.
Mr Morris considered that JobKeeper payments were required to be accounted for consistently with AASB 120 Accounting for Government Grants and Disclosure of Government Assistance. The JobKeeper payments met the definition of "Government grants": AASB 120, para 3. Grants are to be recognised only when "there is reasonable assurance" that an entity will comply with the conditions and that the grants will be received: AASB 120, para 7. Mr Morris noted that the annual report for AMA Group for the 2020 year recorded that the company recognised governments grants associated with JobKeeper as an offset to employee benefit expenses. Mr Archer agreed that JobKeeper was commonly accepted as being within the scope of AASB 120. He considered that AMA Group's treatment of JobKeeper in its annual reports was in accordance with AASB 120.
Mr Morris was of the opinion that Australian Accounting Standards required JobKeeper payments to be recognised as income and included in the determination of EBIT. The Framework for the Preparation and Presentation of Financial Statements, as published by the AASB, defines "income" as "increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants." Mr Morris considered the receipt of JobKeeper payments as an economic benefit that enhanced an asset, being cash at bank. As a result, JobKeeper payments met the definition of income under the Australian Accounting Standards. Government grants must be recognised in profit and loss, and therefore in the determination of EBIT, as either income or an offset to employee benefit expenses: AASB 120, para 29. JobKeeper payments were to be recognised in EBIT as either income or a reduction in payroll expenses.
Mr Morris considered that while Australian Accounting Standards were silent on the manner in which a group of companies should account for government grants and income, income and expenses should be recorded in the entity or division of the entity that generated the income or incurred the expenses. He considered that AMA Group should have recognised JobKeeper payments in the profit and loss of the Businesses and recognised the wages of all employees of those Businesses in their accounts as well. The substance of the transaction was that AMA Group Solutions paid wages and received government subsidies for these employees; Australian Accounting Standards dictated that the subsidies should be offset against the wage expense. As a consequence, the Earn-Out Amount was understated by $1.8 million.
Mr Archer agreed that the Conceptual Framework for Financial Reporting governed the preparation of financial statements and, if is to be included in the financial statements for the Businesses, JobKeeper must meet the definition of income. That definition depended on whether there was an increase in assets or a decrease in liabilities, such that it was necessary to also consider the definition of these terms. Where each of the employees in question were not employed by the Businesses, and there was no evidence of any other agreement between the Businesses and AMA Group, Mr Archer was of the opinion that JobKeeper was not recognisable by the Businesses under AASB 120 in accordance with the appropriate interpretation of the Framework.
Whilst Mr Archer agreed that the Australian Accounting Standards were silent on the manner in which a group of companies should account for government grants, he did not agree with Mr Morris that JobKeeper payments should be recorded as the income of the Businesses where, following the sale of the Businesses, the employees became employed by AMA Group Solutions such that the Businesses were not "eligible employers" of "eligible employees" in the eyes of the Australian Taxation Office and thus not entitled to receive the JobKeeper payments. Nor did Mr Archer agree that generally accepted accounting practice required that income and expenses were recorded in the entity or division of an entity that generated the income or incurred the expense. As an auditor, Mr Archer had observed a variety of practises in this regard. Sometimes only expenses are recorded for departments or divisions, in order to track the divisions or departments as 'cost centres', while revenue is attributed centrally to the parent entity. In other cases, financial information is gathered by region, revenue type or site to assess the financial performance of the region, or particular revenue-generating items or the profitability of a particular site.
Mr Archer said that the accounting standards were silent as to how to attribute items such as the JobKeeper payments and rebates in a group of companies or divisions with a group of companies. This was for good reason, as corporate entities are complex by nature and different components of the group run different activities. Practice varied greatly as to how income and expense were allocated between group entities; sometimes it was done by legal agreement and sometimes based on judgements around the activities undertaken by the group entities. Where the employees of the group were employed by a particular entity, in this case, AMA Group Services, typically there would be a recharge of employment costs between group entities applying an arm's length mark-up to reflect the administrative functions of organising the workforce employed within each of the entities within the group.

Submissions

The plaintiffs submitted that Mr Archer's opinion should be rejected, the opinion being based on the fact that the Businesses' employees were employed by AMG Group Solutions. While employees can only be employed by a legal entity, the Businesses were not legal entities but distinct economic and accounting entities. Clause 5.1 required an EBIT calculation of the Businesses rather than the corporate entities which owned and operated different components of the Businesses. Applying Mr Archer's logic would mean that $7.252 million of labour costs should be removed from the calculation of the EBIT, as it was AMG Group Solutions who was the formal employer rather than the Businesses. This would result in a much larger Earn-Out Amount.
AMA Group submitted that Mr Archer's views should be preferred, being that Australian Accounting Standards did not directly apply to the calculation of EBIT in respect of JobKeeper. Mr Archer's evidence concerning 'normal commercial practice' in normalising one-off earnings was consistent with the approach adopted by AMA management in calculating the Earn-Out entitlement, as stated in an email from Mr Opperman of 22 December 2020.

Consideration

Again, the experts agreed that AMA Group had complied with Australian Accounting Standards in respect of JobKeeper in its Annual Report. The question is whether JobKeeper should be taken into account when calculating EBIT for the Businesses.
It appears to have been in the parties' contemplation at the time of entry into the Business Sale Agreement that the Businesses' employees would become employed by AMA Group Solutions. It was a condition precedent of completion of the sale and purchase of the Businesses and Assets that Key Personnel and the Transferring Employees enter into Engagement Agreements with the Purchaser on terms satisfactory to the Purchaser: cl 2.1(f). Mr Nercessian entered into an Employment Agreement with AMA Group Solutions dated 12 October 2018. Presumably, the Transferring Employees did likewise. Where the Purchaser was entitled to offer employment "on terms and conditions as it determines", there appears to have been no contractual obstacle to AMA Group offering employment by its subsidiary: cl 8.1. While this had the effect of separating the employees from the Businesses in a legal sense, the parties clearly contemplated that Transferring Employees would continue to work in the Businesses after completion of the sale, whether they were employed by AMA Group or another entity in the AMA Group.
Were JobKeeper payments made in respect of the Businesses' employees for, of or referable to the Businesses? I think so. The wages of the Businesses' employees would continue to be of or referable to the Businesses, as would be the income generated by the product of their labours. That AMA Group received JobKeeper directly referable to the Businesses' employees via AMA Group Solutions did not change the quality of the JobKeeper payments, which continued to be for, of or referrable to the Businesses.
Query whether the parties agreed to vary the Business Sale Agreement in this regard when JobKeeper was announced, as a consequence of the emails between Mr Harding-Smith and Mr Nercessian at the time: see [31]-[33]. Clause 21(c) of the Business Sale Agreement provided: 21. Waiver or variation … (c) The variation or waiver of a provision of this Agreement or a party's consent to a departure from a provision by another party will be ineffective unless in writing executed by the parties.
Mr Nercessian's response to AMA Group's proposed accounting treatment in respect of JobKeeper and calculation of the Earn-Out Amount was equivocal and did not amount to consent, assuming for present purposes that the exchange of emails was otherwise be sufficient to be "writing executed by the parties". Given the Court of Appeal's judgment in respect of rectification, it follows that the plaintiffs are entitled to the additional amount calculated by Mr Morris in respect of this item, being $1.8 million.

Orders

Orders for specific performance are unwarranted as there is no suggestion that AMA Group will not perform its obligations under the Business Sale Agreement in accordance with the Court of Appeal's judgment or the orders of the Court. The matter has also been remitted to determine whether the plaintiffs are entitled to their costs of the trial: SSABR Pty Ltd v AMA Group Ltd (No 2) [2024] NSWCA 201. I would be assisted by the parties' submissions on this issue.
For these reasons, I make the following orders: 1. Judgment for the plaintiffs in the amount of $2,174,640 plus interest from 10 January 2021 under s 100 of the Civil Procedure Act 2005 (NSW). 2. Parties to notify any errors or omissions within 7 days. 3. Parties to file and serve any submissions (limited to three pages) and affidavits as to costs within 14 days, such issue to be determined on the papers.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 November 2024

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